RBA cut gives economy breathing room

BUSINESS groups say the latest interest rate cut by the Reserve Bank of Australia is good for economic growth and confidence.

AAPMay 7, 20134:11pm

BUSINESS groups have applauded the decision by the central bank to cut the official interest rates to a new low.

The Australian Retailers Association (ARA) said the move by the Reserve Bank of Australia (RBA) was timely, given a sluggish retail market and a lack of confidence among households.

The RBA cut the cash interest rate to 2.75 per cent, from three per cent.

The move was not expected by financial markets, but the RBA said it had decided it was appropriate to encourage economic growth, given inflation was not a threat.

"With retail sales showing no sustained growth over the past few months amid weak consumer sentiment, the RBA has provided some relief," ARA executive director Russell Zimmerman said in a statement.

"What we need now is for the banks to pass on today's interest rate cut in full."

Soon after the RBA decision, National Australia Bank lowered its standard variable mortgage rate by 25 basis points to 6.13 per cent.

Master Builders Australia, representing the construction industry, said the cut would help stimulate the building sector, as well as the broader economy.

"With a tenuous recovery at risk, the Reserve Bank is justified in cutting rates to boost confidence and stimulate activity," chief executive Wilhelm Harnisch said in a statement.

"A strong housing recovery is vital to fill the gap in the economy created by the slowing of mining-related activity."

Mr Harnisch said the retail banks had a "moral obligation" to pass on the cut to customers.

"The economy cannot afford to have the Reserve Bank's heavy lifting to improve consumer confidence undermined by the banks," he added.

The Australian Industry Group said the RBA's decision was timely given the downturn in the domestic economy.

"Alone this will not act as a silver bullet to boost demand but it is a welcome step to stimulate economic activity," Ai Group chief Innes Willox said.

Mr Willox said all eyes would now be on next week's federal budget amid fears "excessive" spending cuts or tax rises could again negatively impact business activity.

"It is crucial that monetary and fiscal policy are aligned at this time," he said.

Australian National Retailers Association chief Margy Osmond said the rate cut was just what retailers needed and should give households incentive to spend at the shops.

"The sector is doing what it can to get Aussies back to shopping, prices are down and there's not much room for them to drop further," she said.

The Australian Chamber of Commerce and Industry (ACCI) said the RBA had got it right and the rate cut would boost business confidence.

"This is a cut that will add some degree of confidence to Australia's small business community who have seen the cautious consumer as well as rising business costs eat away at their trading profits and eat away at their employing capacity," ACCI chief Peter Anderson said.

He called on retail banks to pass on the cut in full, to give it "bite".

"There should be no ifs, no buts, no clawback."

Asked if the RBA should cut rates again before the end of the year, Mr Anderson said if the labour market continued to soften "then unfortunately it will look like we need a policy response".

National Farmers' Federation said the cut came at a good time for farmers already dealing with the negative impact of the high Australian dollar and trying to access finance.

"We urge the rural lending sector to pass this rate cut on in full to our farmers," president Duncan Fraser said.

But National Seniors Australia says the rate cut will hurt retirees living off investments like term deposits.